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Will Debt Consolidation Affect Buying a Home

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Will Debt Consolidation Affect Buying a Home

How taking a debt consolidation loan before buying a house will affect your mortgage lender’s decision depends largely on timing. Essentially, if you make the leap into buying a home just after or as you’re trying to consolidate your debt, it will almost certainly impact you negatively.

This is because the process of applying for a debt consolidation loan can cause your credit score to drop for the short term. This happens because of the hard credit inquiry triggered by a loan or credit application.

Consolidation could also damage your credit score for a short while because it will increase your overall debt through a loan origination charge or transfer fee on a credit card balance. The result of all these things in terms of a lower credit score while buying a home is the possibility of thousands of dollars in additional mortgage interest rate payments through a higher APR than normal.

Timing is Everything

However, if you time your debt consolidation loan before buying a house correctly and especially if the is arranged with professional help, you can come out with a greatly decreased debt burden and homeownership that was gained with much easier long-term costs.

Managing this means arranging for a debt loan well before you decide to buy a new house or apartment. An added benefit of doing this will be that your debts will consolidate into one single balance with a lower interest rate that allows them to be eliminated faster.

Furthermore, if you also wait on a home purchase so that you can first pay off most of your debt consolidation loan balance, the overall history of on-time payments that this created will positively affect the APR of the home mortgage itself. The overall result of both actions will be a long-term reduction in fees, costs and interest charges.

Other reasons a badly timed debt consolidation loan can negatively affect buying a home include:

Lowered Credit Score, Higher Mortgage Interest

Requesting a debt consolidation loan or a transfer of debt balances will cause a hard inquiry on your credit history. This in turn can make your credit score fall by several points for a few months. The result will be a lower quality mortgage if you’re approved for one during the period when your score is diminished.

Decreased Credit Usage

Consolidating your debts into a new single debt can make your credit utilization ratio decrease by freeing up credit cards that may have been at heir limits. The result of this is an increase in your credit score. This in turn will improve your chances of mortgage approval, as well as the terms of the home loan you get.

Total Debt And Mortgage Applications

Many lenders evaluate their rates and fees for home loan applications based on the outstanding total debt of the applicant. Since debt consolidation loans often come with costs that can increase your overall debt by several percentage points at their start, this will cause your total debt load to be higher, in addition to the damage to your score done by the hard inquiry that the consolidation triggered.

The overall effect of these factors will likely be less than ideal mortgage terms. Conversely, having already paid off much of a debt consolidation loan before your mortgage application will mean a much smaller total debt load and better home loan conditions.

Consolidating your debts into a single payment plan for overall financial well-being is not difficult, it just requires research and possibly consultation with professionals. You can also increase your own legal know-how by requesting information from your state’s consumer protection agencies.  With that said, yes, debt consolidation will affect buying a house. How it does so will depend upon where you are with your consolidation loan.